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October 25, 2007

Microsoft cash cows beat the Street for 1Q08

Posted by David Hunter at 8:35 PM ET.

Microsoft beat Wall Street expectations today when it announced its fiscal 1Q08 results:

On Thursday, Microsoft reported first quarter earnings of $4.29 billion, or 45 cents a share, on revenue of $13.76 billion. That sum easily beat Wall Street estimates of 39 cents a share on revenue of $12.57 billion, according to Thomson Financial.

Revenue was up 27 percent from a year ago–Microsoft’s best growth since 1999. Microsoft got a nice bump from Vista, Office and Halo.

As for the outlook, Microsoft also impressed Wall Street. The company projected revenue between $15.6 billion to $16.1 billion and earnings between 44 cents a share and 46 cents a share. Wall Street was expecting earnings of 44 cents a share on revenue of $15.6 billion. For the fiscal year ending June 30, Microsoft projected earnings of $1.78 a share to $1.81 a share on revenue between $58.8 billion to $59.7 billion. Wall Street was projecting earnings of $1.73 on revenue of $57.4 billion.

Below are the segment breakouts with some brief commentary based on the 10-Q, but the spoiler is that the usual Microsoft cash cows came through big time.

Client:

(millions) % change 1Q08 1Q07

Revenue %25 $4,138 $3,316
Operating Income 27 3,367 2,660

The big contributor here was OEM revenue which increased $706 million or 25% driven by 20% growth in OEM license units which is a trifle odd since Microsoft estimates that total worldwide PC shipments from all sources grew 14% to 16%. The good news is that the revenue per unit is apparently increasing as Vista rolls out.

Business (mostly Office):

(millions) % change 1Q08 1Q07

Revenue %20 $4,111 $3,419
Operating Income 21 2,694 2,227

Unsurprisingly, most of the growth in revenue here ($663 million) was in sales of Office 2007 to businesses.

Server and Tools:

(millions) % change 1Q08 1Q07

Revenue %16 $2,900 $2,496
Operating Income 25 962 771

Another solid quarter for Server and Tools who has major new products launching this fiscal year. One interesting aspect was that, “Consulting, Premier and Professional product support services revenue increased $142 million or 32% primarily due to higher demand for consulting and support services in corporate enterprises.” You don’t hear much about Microsoft consulting anymore.

Entertainment and Devices (mostly Xbox and an occasional Zune):

(millions) % change 1Q08 1Q07

Revenue %91 $1,929 $1,011
Operating Income - 165 (142)

Xbox and PC game revenue increased $895 million primarily due to a doubling of Xbox 360 console unit sales and $330 million from the Halo 3 game. It’s not clear that cost-reduced Xbox 360 units have really arrived since, “Cost of revenue increased $584 million or 99% primarily driven by the increase in consoles sold and increased Xbox 360 console warranty expenses and inventory write-downs.”  That amount more than negates the non-Halo 3 revenue increase so it looks like Halo 3 finally turned E&D profitable all by itself.

Finally, “Increased revenue from sales of consumer hardware products, the Windows Mobile software platform, and Zune was offset by decreased revenue from Mediaroom.” Mediaroom is Microsoft’s IPTV platform.

Online Services:

(millions) % change 1Q08 1Q07

Revenue %25 $671 $536
Operating Income - (264) (102)

The good news is in the “online advertising revenue which grew $120 million or 33% to $487 million.” The bad news is that the addition of partial quarter aQuantive results ($58 million loss including some one time charges on $51 million revenue) isn’t floating this boat.

Corporate Level Activity (overhead and legal): 

(millions) % change 1Q08 1Q07

Corporate level results - $(1,006) $(940)

“Headcount-related expenses increased 15%, driven by an 8% increase in headcount and an increase in salaries and benefits for existing headcount.” This was partially offset by lower legal costs.

Bottom Line:

Microsoft’s usual cash cows (Windows Client, Office, and Servers) came through splendidly to produce a great quarter. Entertainment and Devices looked better than it actually is due to the temporary Halo 3 surge and Online Services is still in the swamp. If there is a cloud on the horizon, it is that unearned revenue dropped by a billion dollars from last quarter primarily in volume licensing agreements ($845 million) which indicates that some of Microsoft’s best customers for the cash cows are considering their options.



Filed under Financial, General Business, Microsoft

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One Response to “Microsoft cash cows beat the Street for 1Q08”

  1. Bob Says:

    “was offset by decreased revenue from Mediaroom”

    Good catch. Hadn’t seen that and it doesn’t make much sense if pilots are progressing.

    “it is that unearned revenue dropped by a billion dollars from last quarter primarily in volume licensing agreements ($845 million) which indicates that some of Microsoft’s best customers for the cash cows are considering their options.”

    Possible. Or possible it’s simply a renewal timing issue since they are historical points where more, or less, contracts expire.

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